Real Estate Ch. 12-13 T/F

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A loan in which the lender receives part of the proceeds from the sale of the property is known as a convertible loan.

False

A property with a higher standard deviation and a higher return is preferable to a property with a lower standard deviation and a lower return.

False

Everything else equal, the loan balance on a negative amortization loan will be less than that on an interest-only loan after the first year.

False

If a property has positive leverage, the owner should borrow as much as possible.

False

In general, investors risk seekers and, therefore, must be compensated more for the higher risk of some investments.

False

One advantage of using leverage is that NOI increases with higher amounts of leverage.

False

One benefit of leverage is that it reduces the variation in returns or losses.

False

Percentage rent is common in office building leases.

False

Real estate has a lot of inflation risk.

False

Real estate that is not leveraged does not have interest rate risk.

False

The loan alternative with the highest ATIRR will always be preferable to the borrower.

False

The range of returns (highest to lowest) is the most common risk measure.

False

The term "financial risk" refers to the probability of interest rates changing.

False

To determine whether leverage is positive or negative, the investor needs to determine whether the IRR is greater than market rate of interest on mortgage loans.

False

When constructing a convertible mortgage, the lender will require a contract interest rate equal to or greater than the market rate on a similar mortgage without conversion option.

False

An interest only loan will provide a higher debt coverage ratio than an amortizing loan with the same interest rate.

True

Financial leverage is defined as the benefits that may result to an investor by borrowing money at a rate of interest that is lower than the expected rate of return on total funds invested in a property.

True

Financial risk increases as the amount of debt increases.

True

If a property owner borrows money at a rate that is higher than the equity yield rate, negative leverage exists.

True

In an inflationary environment where property values are also rising, a participation loan may provide a lender with some protection against unanticipated inflation.

True

In general, real estate is usually considered more risky than bonds but less risky than stocks.

True

Land can be viewed as having an "option" to develop the land.

True

One advantage of a sale-leaseback is that the lease payments are 100 percent tax deductible.

True

One benefit of leverage is that it allows investors diversify across several investments

True

Partitioning the internal rate of return is useful because it helps the investor to determine how much of the return is from annual operating cash flow and how much is from the projected resale cash flow.

True

Properties with a higher ratio of debt are considered to also have a higher risk assuming everything else is equal.

True

The term "due diligence" refers to doing an investigation before buying a property.

True

Use of leverage always increases the amount of risk.

True

When the internal rate of return on an investment increases as the loan-to- value ratio increases, positive leverage exists.

True


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